Wall Street ‘Hearts’ Facebook Stock (And You Should, Too)

by Tyler Craig | November 26, 2012 12:00 pm

Shares of Facebook (NASDAQ:FB[1]) were up as much as 8% early Monday morning, launching the popular social media company to a new three-month high. Impressively, the beleaguered stock has risen 37% in the past two weeks alone.

Based on the charts, it appears the most disappointing IPO stock of the year is — dare I say it — finally receiving some love from Wall Street.

Here are three recent bullish developments:

#1: Signs of Accumulation

The first six months of Facebook’s post-IPO life can really be split into two distinctly different three-month periods. The first three months were a one-sided bearish onslaught plagued by massive liquidation. The last three months, on the other hand, have been much more constructive. Within the past month alone, FB has seen five to six high-volume up-days — otherwise known as accumulation.

If institutions are indeed beginning to embrace the social media king, it has a much better chance of continuing to rise and actually develop a bona fide uptrend.

#2: Base Building

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Facebook spent its first three months mired in a downtrend where every rally met stiff resistance and every selloff took the stock to new depths.

Since hammering out its all-time lows in early September, however, the price action in FB has taken on a much more positive tone. The base that has formed since then has allowed the 50- and 20-day moving averages to flatten out. Better yet, the recent thrust higher caused both moving averages to turn up and actually begin rising.

#3: Reclaiming the VWAP

The year-to-date volume weighted average price (VWAP) on FB is around $24.75. Consider this level the average cost basis for everyone who has bought shares of FB since its IPO. Since the majority of investors are losing money when the stock is beneath this price level, it adds to the amount of overhead supply, making it that much more difficult for the stock to rise.

With today’s launch, FB has now reclaimed this pivotal level, which means for the first time in a long time the majority of FB shareholders are actually making money. This should bode well for the sentiment and price action of FB going forward.

How to Play FB

In light of these positive developments, bullish trades make more sense on FB now than they ever have. The only item that should give traders pause in the short-term is the fact that FB shares are a touch overbought. A pullback in price would present a better risk-reward entry than is currently available.

In the event such a pullback presents itself, traders might consider buying the March 24 call options. The risk is limited to the initial debit paid and the reward is unlimited. The calls currently are trading for around $4, but should get cheaper if FB dips in the coming days.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. FB: http://markets.financialcontent.com/investplace./quote?Symbol=FB

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